The Epicurean Dealmaker

With Friends Like This ...

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 22 Jul 2008 20:53:00 +0000

... who needs enemas?

Okay, okay. Being the self-appointed expert on investment banking compensation on the worldwide web, I guess I have a professional obligation to comment on Evan Newmark's recent cherry bomb post on M&A fees over at the WSJ Deal Journal.

Summary: He wrote a doozy.

I have to say, I kinda like Evan. He's brash, opinionated, and unafraid to publish his smirking picture in a town and a time when the average investment banker hides his Wall Street Journal under a Daily News on his subway commute to work and carries a bounty on his head. He's got cojones, that guy, I'll give him that. And he usually does a respectable job pitching his commentary and explanations of Wall Street to the cheap seats.

But this time I think he forgot he wasn't regaling a bunch of industry buddies at the Bull & Bear. Judging by the tone and content of the majority of comments left on his post, I think he really stepped in it. He might want to hide out a little in the Hamptons for a few weeks or so for this to blow over. Either that, or take to wearing a mustache, wig, and sunglasses at his regular day-trading venue.

Now his argument—that M&A bankers occasionally really do earn their mouthwatering fees—happens to be one that I agree with. If memory serves, I have written as much one or two times in the past.

But illustrating his contention with anecdotes like this falls short—in my opinion—of driving the point home:

Almost a decade ago, as a Goldman Sachs banker, I advised a European client on buying a U.S. publicly traded company for a couple of billion dollars. We had worked for months on the deal, and in a few days of negotiations, hammered out the terms with the board of the U.S. company.

Our client was overjoyed. We had negotiated hard for a purchase price that was 6% above where the shares were then trading.

Effectively, a no premium deal. An M&A banker’s dream. Or nightmare.

It turned out that none of the U.S. company’s large institutional shareholders tendered their shares. They didn’t like the price. We had an agreement to buy the company, but no company.

So now we had to go back to the U.S. shareholders with another price. But how much to offer?

We talked to about a dozen large shareholders. Forget the 6% premium. Now, it was highway robbery. The shareholders demanded takeover premiums of 50% to 75%. That meant another $500 million straight out of my client’s pocket.

That was unacceptable. So my client asked me at what price we could get the deal done. A tough judgment. The team talked it over. We consulted colleagues. In the end, the call was based on gut instinct. Another 25%. No more. No less.

At the close of the tender, we gathered about 55% of the shares, just barely above the 50% needed to close the acquisition.

The good call saved our client several hundred million dollars.

Now, as an M&A practitioner myself, I appreciate that every deal is different, and it is practically impossible to critique a banker's advisory performance from the outside, since one never has access to all the pertinent facts. This generic problem is exacerbated, in this instance, by Mr. Newmark's playing rather fast and loose with the numbers in his illustration, creating the unfortunate effect of generating more fog and confusion that true understanding. But I have to agree with some of his interlocutors that he does not appear to have covered himself in glory in this transaction.

For one thing, it is a rather elemental error in M&A negotiation to fail to consider the motivations and likely behavior of parties which have an important say, or vote, in a deal but which, usually for regulatory or legal reasons, do not have a seat at the bargaining table. As I said, I do not know the complete set of facts, but it does appear to me a rather significant blunder not to have better anticipated the likely reaction of the target company's large institutional shareholders to the 6% takeover premium agreed with the target's Board. (One also might wonder whether the target Board was so easily persuaded to accept this unusually low premium because they knew full well that their shareholders might very well create the conditions for another, much larger, bite at the apple. Hmm. If so, so much for Mr. Newmark's "hard" negotiating.)

For another, in my deal experience one of the most important services a buy-side M&A advisor renders his or her client is a carefully judged, thoughtfully rendered opinion as to the likely "clearing price," or ultimate sale value, of the target company (in the form of a range). It is this type of information, for example, which should be completely understood by the client before it ever undertakes an approach to a potential target. The client should have carefully weighed the likely transaction price, the potential value it could achieve by purchasing the target, and its own ability to pay before its CEO ever picks up the phone to call his counterpart at the target company. It should not be, as Mr. Newmark's narrative implies, an ad hoc add-on or "bonus" service provided to the client under pressure when the original negotiating plan goes off the rails.

Next, while I think I understand what Mr. Newmark was trying to convey by asserting that the final offered premium of "another 25%" (31% in aggregate?) was determined by "gut instinct," I fear he does his firm and his industry colleagues a disservice by saying as much in the pages of the Deal Journal.

There is no "right" number in merger negotiations, just as there is no one, right number in valuing any for-profit enterprise. Valuation, whether in the market or in a deal, is well and truly—and ineluctably, now and forever—an art, not a science. But such gut instincts—rather more accurately described as carefully considered judgments—on the part of M&A advisors are or should be based on a mountain of careful, well-judged analysis, comparison, and argument. You never go to your counterparty in an M&A deal and say your offer of $100 million for his pissant company is based on gut instinct; you give him reasons. You show him where his company's peers are trading in the marketplace, you show him the levels at which other companies in his industry have been bought and sold, and you share your assumptions of the future value of his business enterprise with exhaustively analyzed and justified discounted financial projections. He, if he is not an idiot, will counter with his own exhaustive analysis showing why his gem of a company is really worth $500 million. And you're off to the races.

I would expect no less from Mr. Newmark when he went back to the target company's shareholders with an improved offer, and I am sure they did, too.

Lastly, I find Mr. Newmark's implicit argument that Goldman Sachs earned its fee by saving his client "several hundred million dollars" disturbingly similar—and just as unconvincing—as Mrs. Dealmaker's occasional attempts to justify her splurge on a $10,000 cocktail dress by crowing that it was marked down 40%: "But Honey, look how much money I saved!" Sorry, Evan, no cigar.

Anyway, Mr. Newmark seems to have convinced himself he came out a hero in this transaction, smelling like a rose. (Interestingly enough, Goldman Sachs as a firm seems to have a preternatural ability to convince its clients they have received the best investment banking advice available, no matter how badly their bankers have fucked up. Perhaps Mr. Newmark is still drinking the 85 Broad Street kool aid.) To me, based upon what he has told us, he looks more like one of the Keystone Cops.

M&A bankers do earn their transaction fees, by and large, Dear Readers, but not by acting like this.

© 2008 The Epicurean Dealmaker. All rights reserved.

The Doctor is In

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 22 Jul 2008 13:00:00 +0000

Well, I'm back.

My blogging—never high frequency, even in the best of times—has been particularly somnolent for the past few weeks because I have been reacquainting myself with the missus and the little Dealmakers on vacation. (Don't ask.) I won't bore you with the details, but suffice it to say that it was mostly a sporting vacation, involving lots of perspiration, the callous sacrifice of many small, defenseless animals, and several large helpings of gelato.

The highlights, to my mind, were teaching Junior how to shoot skeet in the Piazza della Signoria and morning iaido practice with a naked blade on the 12th green of Royal Birkdale before the second round of the British Open. (I still can't figure out what the course marshall was trying to say to me before I accidentally severed his brachial artery while executing a particularly difficult kata. Bloody scouse accent is incomprehensible.)

Of course, the exchange rate made the entire exercise a festival of pain, but at least we were able to forgo the cost of equipping our spacious Tuscan villa with toilet paper by using U.S. currency instead.

I note that in my absence you, my Faithful Readers, and your colleagues, friends, and fellow travelers have generated remarkably little news or scandal worthy of comment. The same tired story lines in place before I left still dominate the headlines, and I simply cannot get inspired to sharpen the quill and freshen the vitriol to take it all on again just yet. I am sure a couple of double lattes and a quick read of my most recent deal status report will get those creative juices flowing again forthwith.

The only item of note is the recent defenestration of my favorite poisonous little cherub from the executive floor of Citigroup, but even that was no real surprise. I guess the received story line is that Pandit's Morgan Stanley mafia finally overwhelmed the chubby little scrapper with superior numbers, but I prefer to think he was asked to leave because they simply no longer required his special talents. After all, with private equity flat on its back, legs in the air, and rigor mortis setting in, there really isn't much call for senior investment bankers whose primary talent is not appearing taller than their diminutive squillionaire clients. Oh, that and underhanded knife fighting in the leveraged finance Credit Committee.

Well, I'm off to wrestle my towering inbox into some form of submission, and to see whether I can arrange some long-distance defibrillation of my languishing deals and clients, which have been in decline for some time now. I'll let you know if I find any wooden nickels in the pile.

© 2008 The Epicurean Dealmaker. All rights reserved.

Overheard at 85 Broad Street

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 18 Jun 2008 15:14:00 +0000

This is just sad. Fucking sad.

MD: You're being placed into the accelerated one-year analyst program.

Analyst: You mean I'm being fired?

MD: No, you're being placed into the new accelerated one-year analyst program and will be paid through August.

Analyst: I'm being fired.

MD: There will be nothing on your record indicating you were fired. It'll say you were in the one-year analyst program.

Analyst: I'm being fired.

Unless you are a sick bastard, firing people is no fun, even when they deserve it. It is double no-fun when you have to fire a colleague and friend simply because business has fallen into the shitter and your group/division/investment bank has to cut payroll in the face of reduced revenue prospects, like we face today. It is triple no-fun when that colleague is some bright-eyed youngster fresh out of college or business school who still has stars in his or her eyes about the industry and their formerly bright future within it.

That doesn't mean it doesn't happen in investment banking. I have seen it up close and personal. Sometimes there is even a good reason to fire perfectly competent, inexpensive junior bankers instead of expensive deadweight Managing Directors. (Less often than you might hope, in my experience, but that's politics for you.)

But if you're gonna do it, if you're gonna dash the hopes and prospects of some eager young lad or lass your firm (and maybe even you personally) just hired less than 12 months ago, have the cojones to do it right. Don't lie and dissemble. Don't dodge and weave with the truth, telling your young charge he or she has just been "promoted" to a one-year program when they were hired for two.

Be a man. Not a weak-kneed, lily-livered, unprincipled, ball-less, gutless, prevaricating, backstabbing, motherfucking pussy.

Tell them straight: I'm sorry, you're being fired because we have to reduce our costs in the face of declining business. It is no reflection on you, your talents, or your future prospects. It is simply a business decision we have decided to take. I am sure you will do well in your future career, and I wish you the best of luck.

Look them in the eye. Be honest (or as honest as the inevitable Human Resources weasel in the room will let you be). Shake their hand, if they offer it. And try to remember through your discomfort and embarrassment that it is them who is getting fired, not you. Like I said, be a man. Do the right thing.

That is the right way to do it. That is why I find this report leaking out of Goldman Sachs to be so despicable. Who the fuck do they think they're kidding? Not the analysts getting canned, surely. Not those analysts' potential future employers. And certainly not anyone on Wall Street or among their investors who has not suffered a frontal lobotomy recently.

There is no form of public humiliation excruciating enough, no corporal punishment which causes lasting enough damage to serve as adequate remedy for such low, cowardly, pusillanimous behavior as this. Whoever thought up this stupid, cowardly, insulting plan should be taken to the steps of the New York Stock Exchange, disemboweled, and hung on a stick to dry, along with the senior executives who approved it and the Managing Directors who executed it. Recently laid-off investment bankers below the rank of Vice President should be issued a blanket invitation to come throw rocks and piss on their desiccated remains. Wives and mistresses of the miscreants should have their Henri Bendel store charge cards confiscated and their heads shaved, like captured collaborators in WWII. Their children should be forced to attend state schools and work for the Peace Corps.

Readers are invited to mail other suggestions to the senior management at Goldman Sachs at their leisure.

I feel nauseated. It's almost enough to make me turn in my keys to the executive washroom.

P.S. — Helen, just in case you were wondering, this is a rant.

© 2008 The Epicurean Dealmaker. All rights reserved.

None Shall Pass

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 18 Jun 2008 01:00:00 +0000

Arthur: "Now stand aside, worthy adversary."
Black Knight: "'Tis but a scratch."
Arthur: "A scratch? Your arm's off!"
Black Knight: "No it isn't!"
Arthur: "Well what's that then?" [pointing to the arm lying on the ground]
Black Knight: "I've had worse."
Arthur: "You liar!"
Black Knight: "Come on, you pansy!"

— Monty Python and the Holy Grail

I try to stay positive, Dear Readers, I really do.

While I have never detected in myself that raging strain of congenital optimism prevalent among so many of my confrères in the investment banking world, I do make determined efforts to remain chipper and upbeat with my various clients in the face of the current M&A market slowdown. Like a good little M&A banker, I tenderly hold their hands and reassure them that their faltering little pissant transaction is only a heartbeat away from a spectacular and satisfying conclusion worthy of the record books. Were I not already aware that maintaining such an attitude is simply good business practice for a ~~hired gun~~ strategic advisor, I would no doubt be swayed by the heavy penalties Ye Ancient and Hoary Guild of M&A Workers is wont to impose on its members who are not seen in public with relentlessly cheerful grins plastered on their well-groomed kissers at all times.

But here, nestled comfortably in the bosom of my Trusting and Nonjudgmental Readership, I feel safe in sharing some of my skepticism concerning what I consider to be the excessively optimistic outlooks for the M&A market which are periodically published in the mainstream media. (The reassuring cloak of anonymity helps.)

The latest salvo of happy talk from the land of Honah Lee with which I feel compelled to take issue comes to us courtesy of WSJ's Deal Journal, wherein Stephen Grocer and some pals from Ernst & Young's transaction advisory services group attempt to reassure anyone who will listen that things, really, are not so bad after all.

Yes, global deal volume is down 26% from last year. Yes, the credit markets continue to sputter and talk of recession abounds. Yet amid the doom and gloom, it should be pointed out that 2008 has actually been a pretty good year for deal making.

True a 26% drop is steep. But is it fair to compare 2008 to 2007? ...

Consider another comparison: Global deal volume this year is up 3% from the same period in 2006. And remember, 2006 was the biggest year in M&A history prior to 2007, with $3.93 trillion in M&A volume, according to Dealogic.

Okay, true: so far 2008 has not turned into the Slough of Despond like 2002–2003—yet—but the 2008 over 2006 year-to-date comparison becomes less compelling when one recalls that a great deal of 2006's then-record deal volume came in the fourth quarter, as the Great Deal Engine of 2007 began revving its motors in earnest:

Oops.

Furthermore, an unsuspecting reader who has forgotten his rose-colored glasses at home might read the nifty little quarterly deal volume chart above—and Mr. Grocer's own relation of successive 47% and 33% falls in deal volume in 2001 and 2002 from prior highs—with a great deal less equanimity than he does. One might even draw the conclusion that, based on recent historical patterns in the M&A market, we have a great deal further to fall from current levels than we have seen to date.

Nevertheless, I concede that past is not necessarily prologue in the M&A market. Perhaps declining volumes and declining confidence will not work hand in hand to foster drastically lower deal activity, as they have in the past. This time, maybe it really is different.

Mr. Grocer—or his E&Y sources, it is not really clear which—certainly seems to think so. He gives four reasons why volume declines from 2007 should ameliorate:

1) Deal making fell off the cliff in the second half of 2007. So at the very least 2008 will face easier month-over-month comparisons going forward.

Translation: I have excellent news, Mr. Rutherford. The gangrene advancing up your leg slowed dramatically once it reached your groin area.

2) Corporates and private equity buyers have gobs and gobs of lovely cash, which is simply burning holes in their respective pockets. Plus, strategics simply have to buy stuff. The Polynesian god of globalization says so.

Do you hear that, Steve Ballmer? Get off your ass and buy Yahoo!, you moron. It's globalization, and consolidation, and strategic imperatives, and stuff. Sheesh. You might also want to put in a bid for one of those shitty legacy airlines the Wall Street Journal has been flogging to everyone and sundry for the past 12 months. I'm sure there's a "globalization" angle there somewhere. I dunno: world travel?

2) (continued) Oh, and just you wait. Private equity has boatloads of simoleons they have to put to work, too. Boy oh boy, as soon as those pesky banks start lending money again and stop renegotiating higher interest rates and tighter covenants on existing bank facilities every time a healthy PE portfolio company wants to do an add-on acquisition, you're gonna see private equity bounce back, big time.

Uh-huh. Just you wait. Any day now.

3) It's true those damn sellers just haven't adjusted their expectations down the way they should have already. Stubborn bastards. Well, they'll collapse in despair soon, and everything will be rosy again.

There might be that little, tiny, baby problem that the only sellers who sell at low multiples are the ones who have to. These, by definition, comprise a much smaller number (read:lower deal volume) than those who sell willingly when the Seventh Fleet of drunken buyers pulls into port (viz., e.g., 2007). There is also that disturbing documented tendency of sellers to cling to higher value expectations in the face of a declining market much longer than efficient market theorists (and cheapskate buyers) would predict. Existing home sales, anyone?

Lastly, my favorite:

4) [The] M&A marketplace is increasingly global. Sovereign-wealth funds are ... prowling on the M&A front. Meanwhile, corporations from Brazil, Russia, India and China are looking to do deals. In the first 19 weeks of 2008, M&A volume reached $91 billion in Brazil, Russia, India and China, up from $78 billion a year earlier. Companies in those countries, like Vale, are looking beyond their borders. The Brazilian miner is raising $15 billion that it may deploy to do deals.

Woohoo! $15 billion. Look out baby!

Of course, at $91 billion year to date, annualized M&A volume from the BRIC countries would make up only 6.3% of 2006's global total. A pipsqueak is still a pipsqueak, no matter how fast he is growing.

Anyway, I guess I can't blame Mr. Grocer or Deal Journal for talking their book. After all, it must be pretty tiring to rehash the same old story every day about Jerry Yang, Carl Icahn, or Seth Tobias. I'm even more sympathetic toward the E&Y TAS guys. Christ, with the percentage of their business which depended on the private equity feeding frenzy—and which has vanished overnight—those guys must be scrambling to place positive M&A stories in every high school paper and church group newsletter they can, much less the WSJ. The Carlyle Group sure as shit isn't returning their calls.

Of course, optimism, determination, and a positive attitude are all admirable things. As I have stated in the past, the typical investment banker simply cannot survive without them. However, one must still guard against losing complete touch with reality, or reality might happen by with a really sharp sword and chop your limbs off one by one. There's no upside in being a looney.

© 2008 The Epicurean Dealmaker. All rights reserved.

Bubble Land

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 14 May 2008 02:11:00 +0000

The medium is the message.

— Marshall McLuhan

Dear and Cultured Readers, I am thrilled to have this opportunity to share with you some happy news.

I am pleased to announce that today is a red letter day for Umberto Eco, semioticians, and cultural anthropologists everywhere. I have no doubt that entire university departments around the globe will look back on this week as the seminal period in academic scholarship's institutional understanding and exploitation of the Great Private Equity Wave of the mid-2000s. Many scholars I have spoken with this evening have shared with me their gossamer hopes that today has been revealed the Rosetta Stone which will allow them once and for all to decipher and contextualize the overarching socioeconomic context of the Second Gilded Age we now find ourselves within.

Of what ominous portent of Doom and Glory do I write, you timidly inquire? Why, of nothing less than the public release of The Blackstone Group's first annual report.

* * *

Now, I realize that there may be those among my Faithful Audience who turn—or have already turned—immediately to decode, denote, and comprehend the content of this portentous document for particular purposes of your own. Perhaps you wish to decipher the dense and incomprehensible financial statements in order to understand the relative success, failure, or deeply hidden business secrets of The Blackstone Group. Perhaps—unhappy thought—there are those among you who ignored this writer's previous advice and actually purchased units of the BX chimera with some vague and muddled sense of investment opportunity, and now seek to discover whether you have made a sensible decision or not. (Uh, that'd be not.) Or perhaps there are even those, friend and foe alike, who wish to decode the delphic utterances of the Grand Satrap himself, Mr. Steve Schwarzman, in his letter to unitholders in order to wrest their hidden meaning from the layers of homogenized corporate happy-speak in which he entombs them.

These are all noble and useful objectives, I grant you. Perhaps after I have taken care of the 548th item on my permanent to-do list (repaint the riding lawnmower at the Hamptons beach house teal) I will actually get around to doing a similar thing. But this is not whereof I speak.

No, I speak of the veritable cornucopia of signs and symbols virtually teeming off the pages of this gladsome artifact, signs and symbols which—to this correspondent's naive eye—literally swarm with meaning and portent in this, the Year of Our Lord 2008.

Portents

Now I freely admit that I am no professional semiotician, nor even a second-rate Baudrillardist from the University of Toulouse. I can assure you I have no idea what unfiltered Gauloises taste like. But you do not need to have a ratty beret, elbow pads worn shiny on your tweed jacket, or a blurry photo of Brigitte Bardot in your motheaten wallet to observe and note some interesting things about the BX report.

For example, what the fuck city are the photos of BX employees taken in? The document captions claim that most are posed on the plaza of BX headquarters, which is located on Park Avenue in the middle of midtown New York. But I, for one, can tell you that I have never seen the city as empty of all other humanity—especially in Midtown, during daylight hours—as the photos of Blackstone's employees and executives portray. It's almost as if Steve Schwarzman looked out the window on September 11th, after the terrorists vaporized the World Trade Center, and said, "Hey, guys! The streets are empy! Everybody outside quick, so we can take photos for the annual report!"

Of course, that is probably not what really happened. (At least I don't think so.) Instead, some psycho art designer with a lip tattoo and a tongue piercing probably had a digital photographer take separate photos of people and streetscapes, edit the surplus humanity out of the picture, and splice together the images into the eerily post-apocalyptic scenes scattered so gleefully through the document. I mean, honestly, it looks a like some weird mix of The Vampire Chronicles and 28 Days Later. If I were one of those employees, I'd file a workman's comp claim for mental trauma.

And notwithstanding the palpably creepy vibe this pseudo-naturalistic photographic treatment gives the whole document, it is completely at odds with the normal practice and objective of public corporations when they communicate with their shareholders through an annual report. In this day and age, public companies fight a constant battle in the arena of public opinion to be viewed as honest, trustworthy, and not entirely composed of rapacious, dastardly scumbags who would sell Osama Bin Laden a dirty bomb just to make next quarter's numbers. Accordingly, most companies make a sustained and concerted effort in their public communications—anchored by their glossy annual report—to persuade their shareholders and the interested public that they are authentic, and not shifty, lying bastards.

But when your annual report is riddled with "naturally posed" photographs of happy executives and worker bees which even a Kalahari Bushman would recognize as digitally altered composites, you tend to undermine whatever message of authenticity and respect for the truth you might have tried to communicate elsewhere.

It also tends to undermine the message Blackstone may have been trying to convey about its own humanity when the most lifelike figure in the entire report is the wax figure of Nicole Kidman at BX portfolio company Madame Tussauds.

A Brief Digression

[By the way, is it just me, or has anyone else noticed that Madame Tussauds' so-called likenesses of famous people are almost always no such thing? I mean, as someone who has marveled at the plastic arts of portrait sculpture and the ability of a good sculptor to capture the very essence of a sitter or personality—in addition to his or her actual likeness in three-dimensional space—I must say that I have always found the wax effigies in MT's emporia almost always exactly wrong in several important ways. The figure of Nicole Kidman pictured in the BX report, for example, is a quite nice (and slinky) portrayal of any number of generic undernourished, overambitious Hollywood starlet social climbers, but it bears almost no resemblance to the actual item. (I actually had to check the photo caption to see who this saucy sculpture was supposed to represent.)

What has consistently amazed me is that Madame Tussauds seems to have accomplished this not-very-close-but-definitely-no-cigar type of misrepresentation on almost all of the many hundreds of current and historical personages in its showrooms. Such consistency in missing the mark really must require a considerable amount of skill. I don't know—perhaps celebrities pay MT's to botch their portraits just so so the original cannot be confused with the otherwise indistinguishable wax reproduction in movie casting rooms, or maybe it is a clever ruse to put potential stalkers, paparazzi, and bill collectors off the scent. Unfortunately, this hypothesis does not explain why MT's portraits of Abraham Lincoln and Albert Einstein both have a similar uncanny resemblance to Billy Crystal.

Anyway, certain mysteries were not meant to be solved, but I thought I would share my confusion with you anyway.]

* * *

Second, what kind of self-image do these images of Blackstone's personnel convey? That they are so fucking powerful they use the streets of Manhattan for a conference room? That New York City itself is merely a vaguely fake-looking background to the important issues BX deals with every day? That BX functions in a surreal bubble devoid of all other human presence? That the Executive Committee likes to reenact scenes from Reservoir Dogs?

Third, what's with the black cover? A sort of reverse Beatles White Album? An evocation of the all-powerful monolith from 2001: A Space Odyssey? A sympathetic black armband for pathetic unitholders who have lost somewhere between 35 and 50% of their investment value in BX shares since the IPO? Or just a "We're so powerful and important we don't need to put anything on our annual report cover" fuck-you?

And last but not least—although I admit the connection to semiotics or symbolism is tenuous at best—what the hell is with Steve Schwarzman's suit? I mean, the guy is a fucking billionaire, and he looks like he's wearing something The Men's Wearhouse custom-made for MC Hammer. I haven't seen pants that baggy below 116th Street since 1988.

Get a fucking tailor, man.

(Oh, and next time, hire someone who actually knows what they're doing to design your annual report.)

© 2008 The Epicurean Dealmaker. All rights reserved.

Three Haiku

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 28 Apr 2008 01:30:00 +0000

Equity Private
Makes fun of Michael Porter.
Go ahead: read it.

II.

EP loves Apple
Computer, a fact I find
Strangely amusing.

III.

I love her writing,
But it is too long to read
On an iPhone screen.

Not Safe for Work

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 26 Apr 2008 01:21:00 +0000

Stranger: "There's just one thing, Dude."
Dude: "And what's that?"
Stranger: "Do you have to use so many cuss words?"
Dude: "What the fuck you talkin' about?"
Stranger: "Okay, Dude. Have it your way."

— The Big Lebowski

In between dusting off my snowglobe collection and watching my backlog of "Highly Probable" M&A deals drift into the "Maybe, But Don't Count on It" and the "Who the Fuck Do You Think You're Kidding?" columns of my revenue report, I have had plenty of time to contemplate the mysteries of modern life.

Like: did Al Gore really invent the internet? Does the "Prince of Wall Street" still have a job offer in Financial Sponsors at a "bulge bracket" bank? And, is it true that Equity Private and Dan Loeb plan to use a mixture of shredded 10-Qs and portfolio company business plans as confetti at their upcoming wedding scheduled for a secret location off the Dalmatian Coast?

We may never know the answers, Dear Readers, but certain questions are worth asking anyway, no?

Along similar lines, I have had little success puzzling out the method behind the madness of certain other sites in the blogosphere in linking to these pages. Given the uniform brilliance, concision, and topicality of the posts which I so modestly share with you here—with which assessment I am sure the cleverest of you will heartily agree—I am constantly surprised that every site in the econoblogosphere and beyond does not automatically link to each and every one immediately upon publication.

(This confusion of mine does not extend to those few websites—which shall remain nameless here in their all-too culpable shame—whose failure to link to even the most incandescent and stupefying of my literary emanations is patently due to mean-spirited, uncomprehending envy. Face it, you sad pretenders, only the Great are called to Glory in the Pantheon of Genius, and your ticket stub expired years ago.)

Because lack of quality or intelligibility are so clearly not even worth considering as possible reasons for respectable, upstanding sites not to link to my posts, I can only conclude that the fault, Dear Readers, lies not in my stars but in my language.

And by "language" I do not mean to refer to that old canard that my diction and writing style is somehow excessively stilted, ornate, or pitched above the heads of all but the most erudite, perceptive, or anal-retentive of readers. After all, even the poster boy for plainspoken English prose, Ernest Hemingway, was not averse to using the occasional "ten cent" word and run-on paragraph when it suited him. (Usually in the context of sex, natch.)

No, by "language" I mean those naughty bits which get caught in the teeth of censors, FCC bureaucrats, and Episcopalian ministers everywhere; namely, cuss words.

Now, I have alluded before to the "functional Tourette's syndrome" which can afflict the ranks of junior investment bankers.¹ It occurs to me that I may not have made clear to those non-investment bankers in my audience (thank God for all three of you) that this coping mechanism is not limited to the clueless and jejune underclass of Analysts and Associates. Rather, it extends all the way to the top of the company pyramid as a permanent feature of social discourse within the four walls of an investment bank. No matter how high you rise on the org chart, you simply cannot maintain your authority, gravitas, or blood pressure without unleashing the occasional torrent of toe-curling language so foul and despicable that Lenny Bruce himself would cut his hair and join a convent if he heard it.

Having burned a few blue streaks into the wall-to-wall carpet of a few investment banks myself, I can testify to the fact that one usually feels appreciably better after having unloaded on some unsuspecting Analyst, computer screen, or (absent) client with such a tirade. Furthermore, as long as one is not on the receiving end of such a bombardment, one usually finds the performance quite amusing. There really is nothing quite so rib-tickling as overhearing a colleague deliver a ten-minute monologue on the inadequate parentage, physical endowment, and sexual morals of another person or object without having to use more than 15% of his words from the stock of those acceptable to the evening news.² There is a certain grandeur to filthy language, especially when it is delivered with conviction, and abandon.

But apparently many, many websites in this country cling to the patently false delusion that they are somehow "PG-13" sites oriented toward the putatively sensitive and tender-hearted "Man on the Street." Really, guys, what are you smoking? Sure, it is demonstrably true that 28.6% of the combined readership of the Wall Street Journal's Deal Journal and the New York Times' DealBook has an emotional age of 14, but I guarantee you that 98.6% of those individuals are of legal drinking age and possess at least 13 back issues of Juggs magazine. It is heroic to assume that anyone outside the investment banking, private equity, and hedge fund industries even gives a shit about what happens on Wall Street or in the world of finance. Certainly, the emanations and soundbites we hear daily out of Washington, D.C. and the non-financial media give us no reason to believe that anyone is paying attention to the facts.

However, I can take comfort that not all of my off-color diatribes fall upon entirely stony ground. There does seem to be some appreciation of my finely honed and fiercely delivered excoriations among my cultural and linguistic forbears across the pond. Personally, I have always held a soft spot in my heart for a race which can coin (and unselfconsciously deliver) a phonetic and descriptive gem like "wanker." I mean, crikey, even their bloody parrots say it.

However, I would not be honest if I did not share a certain queasiness I felt when I discovered recently that my rant about JPMorgan's takeover of Bear Stearns was the most popular post this site has ever published, by an factor of two or more, and that virtually all the offending traffic came from Old Blighty, erstwhile Queen of the Waves. Given that the piece was riddled throughout with references to defecation, buggery, and forced penetration of all kinds, I begin to worry that my English friends have not quite—to paraphrase an old joke—left their old public school chums behind.

Bah-dum-bum.

¹ Careful readers will note that I was much more liberal in my use of obfuscating asterisks when I referred to unapproved vocabulary in such early posts. I have become bolder—and, I must admit, lazier—in my old age. Those of you who do not approve of this development can go ~~f**k~~ fuck yourselves.
² I am no cunning linguist, but I tend to believe that it is often the proportion of naughty to clean bits in a particular utterance, rather than its absolute length, which determines its snicker-worthiness. I can think of no better example in this regard than my favorite utterance from that underrated cuss-fest, The Commitments:

"Fook you, ya faht fooker!"

Of course, alliteration helps.

© 2008 The Epicurean Dealmaker. All rights reserved.

The Scorpion and the Frog

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 23 Apr 2008 00:31:00 +0000

Once upon a time, there was a frog which lived happily on the bank of a broad river. It was a good riverbank, with plenty of flies to eat and lots of nice, cool water in which to swim and dive. Life was good for the frog.

Then, one day, another frog which had heard of the nice river came and made his home just down the riverbank from the first frog. At first, the two frogs were cordial and polite. While they were not really friends, and they were natural competitors for the bugs and other food on the bank, there seemed to be plenty to go around, so they lived in peace with one another.

After a while, though, the riverbank began to change. The river itself became wilder, colder, and more dangerous. At the same time, the flies, which had been so plentiful, began to disappear. Soon, the two frogs began to fight over the few bugs and pockets of calm water that remained on the riverbank, and they became implacable enemies. They would fight and squabble every day, until they were gaunt and exhausted from stress and lack of food. There came a day when they could not even rouse themselves to fight over a stray dragonfly that was blown onto the riverbank by a passing storm.

That morning, as the first frog lay panting and starving in his little hole, a scorpion wandered down to the riverbank and struck up a conversation.

"Hello there, Mr. Frog. How are you this fine morning?"

The frog just grunted, so the scorpion continued: "I have heard that the other bank of this river," which was too far away for the frog to see, "is a veritable paradise of gentle pools, soft breezes, and fat, juicy bugs." The frog perked up a little at this.

"Unfortunately," the scorpion continued, "I cannot swim. Therefore, I am looking for a trusty frog to take me across the river on his back so I can enjoy this riverine nirvana. Would you by any chance be interested in taking me?"

The frog was sorely tempted by this offer, thinking that he would no longer have to share the slim pickings of his current home with the second frog. However, he noted the morning sun glinting on the sharp tip of the scorpion's stinger and gulped.

"But how am I to know that you would not stab me with your stinger once you are on my back and kill me, Mr. Scorpion?"

"Why, Mr. Frog, I am surprised at you. If I stung you while we were in the river, you would drown, and so would I. Remember, I cannot swim. I only thought you might find my proposal interesting," the scorpion sniffed, looking around at the frog's dismal hole, "since it looks like you could use a change of scenery yourself."

"But," he continued, "if you are not interested, I hear there is another frog just down the bank from here. Perhaps he would be agreeable to my proposition."

"Oh, no, no, no!," exclaimed the frog, brushing aside his qualms, "I would be delighted to carry you across the river."

"Excellent," replied the scorpion. "Since I will be on your back and able to see over the river's waves to the other bank, I will act as your pilot and navigator. And once we reach the other side, I will catch and kill twenty juicy flies for you in recompense for your generous assistance."

The frog was well pleased with this, so he and the scorpion set out immediately for the water's edge to make their crossing.

As soon as they arrived, however, the frog had a nasty shock. There, at the water's edge, was his frog neighbor and a second scorpion, apparently preparing to cross the river just as he and his companion were planning to do. Each frog became enraged at the thought that his deadly enemy would cross the river to froggy paradise, so they began bellowing at each other and girding for battle.

The two scorpions, however, who just wanted to get to the other side and who needed these silly frogs to carry them, intervened with their companions and attempted to calm them down.

"Gentlefrogs, gentlefrogs," the first scorpion exclaimed, "surely there is no need to fight about this. I have heard that there are bugs enough for all of us on the other side of the river. Besides, the opposite riverbank is much larger than this one, so you will each be able to live in peace and plenty without ever even having to catch sight of one another."

"This is true," asserted the second scorpion. "I have heard it as fact from a raven which told me the tale last week. Please do not fight, and let us all cooperate, to our mutual benefit."

The frogs, who were frankly too exhausted to make a good fight of it anyway, saw the wisdom in the scorpions' words and allowed themselves to be talked out of a battle. After a while, they even suggested that the scorpions tie one of each frog's hind legs to the other with some grass, in order to make a more stable platform for the scorpions to ride on and to make the burden of swimming the turbulent river more manageable for the tired frogs.

The four companions now prepared for their crossing. There next erupted a bit of a scuffle between the scorpions, when it became clear that they each expected to have the prestigious role of pilot to the expedition, rather than the less important one of navigator, but the tolerant frogs were able to restore peace with a promise that the scorpions could share both duties equally in the crossing. All was well once more, the little expedition pushed off the bank, and the frogs began swimming to the promised land with the scorpions on their backs.

Unfortunately, however, the sun soon sank below the opposite bank, as the four companions had already wasted much of the day in argument. In the dark, the frogs became lost, and the scorpions began to argue heatedly, each blaming the other for getting the flotilla lost and complaining vociferously that his rights and privileges had been trampled on by the other.

The scorpions soon came to blows. In striking at the other with his tail, one of the scorpions missed and accidentally stabbed one of the frogs in the back. In the dark and confusion, it was not clear who had struck the fatal blow or indeed which frog had been stung. Nevertheless, since both frogs were tied together at the leg, the paralyzed frog dragged the other—and both of the still-squabbling scorpions—down to the bottom of the cold, dark river, where they all perished.

Fortunately, however, there is a happy ending to this sad story. A big catfish later found the four companions floating on the riverbed and enjoyed a wholesome and delicious evening meal.

Which leads us to the moral of our story:

Only bottom-feeders will benefit from an airline merger.

Melancholia

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 20 Apr 2008 18:01:00 +0000

To pleasant songs my work was erstwhile given, and bright were all my labours then; but now in tears to sad refrains am I compelled to turn. Thus my maimed Muses guide my pen, and gloomy songs make no feigned tears bedew my face.

— Boethius, The Consolation of Philosophy

Things are a mite quiet here at the Volcano Lair, Dear Readers.

I assume the clever among you will have already inferred this fact from the relentless drumroll in the financial press about declining M&A volumes, struggling investment banks, and the like. Blah, blah, blah.

Like all dutiful merger advisors, I continue to do my best to persuade my corporate clients that now is the time to strike, while Steve Schwarzman and Henry Kravis are busy renovating their secret Italian love nest away from the harsh glare of media scrutiny. But the intelligent and well-funded among these—a distressingly high proportion thereof, to my continual disappointment—just look at me skeptically and say, "Why bother?"¹

Indeed, "why bother" is an attitude I perceive generally in the financial zeitgeist at present. The media, sad to say, are not helping.

Admit it, now, how many of you are enthralled to pick up your morning newspaper to read the 337th story this month on the subprime/mortgage/CDO/CDS/auction rate security crisis du jour and whether it is a) over, b) just getting started, or c) all Ben Bernanke's fault? Even the perma-bearish Bloggers of the Apocalypse, like Nouriel Roubini and pals, have become tired and tiresome to read; now, in what should be their hour of glory. They were a lot more fun to listen to when the party was in full swing, and their jeremiads carried the desperate tang of Cassandras who know they are right but can get no-one to listen.

Meanwhile, the rest of us soldier on, heads down, with appropriately downcast and guilty expressions painted on our faces to show that we, too, realize we were at fault in this and therefore should not be sacrificed on the General Altar of Economic Contrition. Even the profiles of potential villains of the month we read nowadays, like those of mortgage meltdown lottery winner John Paulson and evil-genius-turned-bumbling-oaf Stephen Feinberg, carry all the gustatory excitement of cold mashed potatoes on a dirty plate. Who cares?

It is against this cheerless background that your Dedicated Correspondent finds it difficult to lift the proverbial pen and dash off yet another scintillating missive from the frontiers of Vanity, Hubris, and Financial Shenanigans. If they are not in fact being good, the Naughty are busy pretending to be so—or at least hiding in St. Tropez—and the Vain and Hubristic are mostly lying in such an impressive pile of smoking ruins that even the most vengeful scold is getting tired of pissing on their ashes.

In short, Dear Readers, I lack material.

But I have high hopes that this condition is merely temporary. Neither economic recession—whether in progress, merely looming, or just a figment of anti-capitalist scaremongers—nor a newly discovered probity and sobriety among the Captains of Finance and Industry can persuade me that Human Folly has been repealed in perpetuum. I am unshakeable in my belief that there are individuals out there, right now, who are planning their own apotheosis and subsequent self-immolation on the field of Mammon with such a grandeur and flair that my very fingertips tingle with excitement. I promise you, Faithful Readers, that as soon as they lumber out I will set forth, quill and keyboard in hand, to puncture their pomposity and skewer their self-regard as of old.

In the meantime, I can do little more than paraphrase the Immortal Bard:

"An ass, an ass! My kingdom for an ass!"

¹ The unintelligent and underfunded generally ask another question: "Can you introduce us to your restructuring partner?"
© 2008 The Epicurean Dealmaker. All rights reserved.

Jack-Jack Attack

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 17 Apr 2008 22:37:00 +0000

To: jack@jack.com
From: The Epicurean Dealmaker
Subject: Jeff Immelt

Dear Jack —

I saw that you apologized on CNBC today for the televised ass-whuppin' you gave Jeff Immelt yesterday after GE's earnings release. I'm sure Jeff appreciated the retraction, and I know for a fact that he hopes you don't "get out a gun and shoot" him if GE misses again. He asked me to tell you that he is working like gangbusters on the Gordian Knot puzzle you left him, but he still hasn't found the bottle of Jack's Secret Sauce you hid in the company boardroom. (Gosh, you guys are clever. I never knew the GE Way included scavenger hunts for the incoming chief executive.)

Heaven knows, there seems to be a surfeit of underemployed, overexposed old farts running around burnishing their reputations at the expense of their successors, but I am glad you had the cojones to call "foul" on yourself for your little indiscretion. While there do seem to be a few skeptics out there, the ~~brown-nosing sycophants~~ anchors on Squawk Box certainly seemed to think you're a stand-up guy, so you must be okay.

Of course, if you really were trying to be supportive of Immelt, rather than boosting your waning speaking fees by putting in another gratuitous appearance on CNBC, maybe you should have said something more on point, like the following:

"Ya know, I've got a helluva lot of respect for Jeff, 'cause he's been trying to dig himself and GE out of the stinking sump I left 'em in when I sashayed off into the Cialis Sunset with Suzy. Who knew that a sprawling conglomerate with revenues greater that the GDP of many countries couldn't grow faster than the global economy forever? Lemme tell ya: I sure didn't.

"'Course, in my day, it was a helluva lot easier to deliver on 15%-plus earnings growth every quarter when we had an entire accounting department dedicated to smoothing earnings through sleight of hand and reserves management. We also didn't have any namby-pamby audit partners waltzing into the boardroom pretending they had spines, either. (I really hate those Enron smartasses. They just had to go and ruin a sweet little game for the rest of us.)

"Anyway, I'm sure Jeff'll do a helluva job, 'cause he's a helluva guy. Why, Suzy likes him so much she told me she's gonna give him a great big interview the next time I go out of town on a speaking jaunt. And Suzy, well, I trust her judgment, 'cause she's a helluva gal."

On second thought, Jack, maybe the whole public appearance and speech thing wasn't the best idea in the first place. I know you pride yourself on your outspokenness, but where I come from there's only one thing that comes "straight from the gut," and it don't smell pretty.

Maybe in the future you should perform your evacuations in private, rather than depositing your straight talk in a steaming little pile on national television. That way, you won't have to apologize later for stepping in it.

Stupid old man.

© 2008 The Epicurean Dealmaker. All rights reserved.

Born and Bred in a Briar Patch

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 01 Apr 2008 20:39:00 +0000

"Who asked you to come and strike up a conversation with this Tar-Baby? And who stuck you up the way you are? Nobody in the round world. You just jammed yourself into that Tar-Baby without waiting for an invitation," says Brer Fox, says he. "There you are and there you'll stay until I fix up a brushpile and fire it up, 'cause I'm going to barbecue you today, for sure," says Brer Fox, says he.

— Brer Rabbit and the Tar Baby, retold by Catherine Farrell

Katy bar the door!

Having failed to unwind their ill-thought-out investments in Delta Air Lines and UAL and slink off quietly into a dark corner, as I recommended last November, Pardus Capital has suspended redemptions by its investors.

Pardus Capital Management, the hedge fund manager that has pushed for the merger of United Airlines’ parent UAL and Delta Air Lines, has suspended investor redemptions because the $2 billion firm has been hit by market volatility this year.

“The actions we have taken will allow us to protect the funds and their investors from the external short-term pressure of the broader financial markets,” New York-based Pardus said Monday. “The funds have been disproportionately affected by recent market volatility.”

Pardus, an activist investment firm that takes big positions in a small number of companies, owns stakes in both Delta and UAL and has proposed consolidation in the business. It’s also been active in the automotive industry, with positions in General Motors Corp., Delphi Corp.

While it is true that the volatility¹ of Pardus' positions has increased dramatically—along with that of every other stock in the market—I seriously doubt that is why they are barring the door to withdrawals from their long-suffering investors. After all, Pardus is an activist investment fund, one which takes a few concentrated stakes in purportedly undervalued securities, finances them entirely with equity, and pushes for change to unlock hidden or trapped value. Day-to-day or week-to-week fluctuations in the market price of their positions should cause them no worry whatsoever, since they don't get hit with margin calls. Furthermore, the activist investor model requires a certain amount of patience, since even its most impatient practitioners recognize that it takes time to turn around a target company's strategy and performance according to their design.

Rather, I think the value of the Pardus funds has been "disproportionately affected" by something quite different: its managers' spectacularly crappy investment decisions. Airline mergers? The automotive industry? What's next? Changing corporate governance at a French software company?

Pardus has been among the worst performing big activists, losing about $800m, almost a quarter of its value, in November and December and almost another 10 per cent by the end of February, according to investors.

This isn't a case of a little excessive leverage coming back to bite an inattentive manager, but one of a manager purposely choosing to invest his LPs' funds in a couple—or three—of the biggest tar babies in the investment universe.

Now, the investors are stuck, with Pardus telling them not to expect return of their funds for up to two years. What befuddles me is what the Pardus managers think is going to happen in the next two years to pull their chestnuts out of the fire.

Deus ex machina is not a valid investment strategy, Mr. Samii.

¹ Volatility is a directionless measure of (stock) price variation, Children. Pardus's investors are banging on its doors because its positions are going down.

© 2008 The Epicurean Dealmaker. All rights reserved.

Devil Take the Hindmost

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 27 Mar 2008 21:01:00 +0000

From Bloomberg News this afternoon:

Bear Stearns Chairman Cayne Sells His Entire Stake in the Firm
By Yalman Onaran

March 27 (Bloomberg) -- Bear Stearns Cos. Chairman James "Jimmy" Cayne sold his shares in the firm prior to a shareholder vote on the company's pending takeover by JPMorgan Chase & Co.

Cayne sold 5.6 million shares at $10.84 a piece on March 25 on the New York Stock Exchange, according to a regulatory filing today. Bear Stearns spokesman Russell Sherman had no comment on why or to whom Cayne sold his shares.

Good for you, Jimmy. After all, if Lazard said $2.00 a share was fair, and $10.00 a share was fairer, then surely $10.84 is even more fairer-er.

Send us a postcard from the Plaza, will ya?

© 2008 The Epicurean Dealmaker. All rights reserved.

Scatology

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 26 Mar 2008 19:45:00 +0000

Large man: "Who's that, then?"
Cart driver: "I dunno, must be a King."
Large man: "Why?"
Cart driver: "He hasn't got shit all over him."

— Monty Python and the Holy Grail

I'm still here, Dear Readers. Truly.

I have just been struggling a little with uncharacteristic tongue-tiedness in the face of the magnificently operatic Cluster Fuck of the Century we have all been witnessing for the last week or so; namely, the Bear Stearns Imbroglio.¹

I mean, what can one say? It is magnificent, it is operatic, and it makes Hiroshima look like a damp squib in a Folgers coffee can.²

Depending on which source you listen to, JPMorgan's Jamie Dimon is either a reluctant pawn in Hank Paulson and Ben Bernanke's vengeful plot to ram a splintered stick up Jimmy Cayne's ass for DK-ing the Fed and Wall Street when Long-Term Capital blew up ten years ago, or he is a Machiavellian monster who is taking out his two-dollar broker's insecurities by buggering anyone in a three piece suit he can get his greasy little hands on.

Bear Stearns' shareholders, of course, are totally fucked. I do not know what the market rate for bareback anal is in this town, but Eliot Spitzer's recently publicized travails lead me to believe it is a lot more than $2.00 (or $10.00) per share. I am sure no-one, including me, feels sorry for billionaire Joe Lewis, but you do not need to be Bill Clinton to feel the pain of thousands of BSC support staff and administrative assistants in Staten Island, Brooklyn, and elsewhere who are gazing hopelessly at a smoking crater where their company stock retirement plan used to be.

The investment bankers and traders at Bear have been royally rogered, as well. No-one feels sorry for them, of course, especially the Lord of the Flies crowd clogging the comment pages of the New York Times DealBook and the WSJ Deal Journal. Although I suspect each and every one of those pseudo-socialists cackling merrily at the evaporation of billions of dollars of wealth from the personal balance sheets of BSC bankers would themselves be far more willing to chop their little peckers off with a rusty knife than suffer a similar percentage hit to their own financial position. Risk-averse pussies.

Some of the bankers and traders with marketable skills (or salacious photographs of Jamie Dimon and Jessica Bibliowicz) will land on their feet, either at JPMorgan or elsewhere. But Wall Street is contracting, so many will not. The ones who don't are probably gone for good, and face the prospect of limping off to a corporate development job at Pfizer with a permanently shrunken balance sheet, to boot. The ones who do survive, weakened but employed, will be an interesting test case of Martin Wolf's thesis that incentive clawback is the proper way to pay financial workers. ($170 to $10 per share is a helluva clawback.) I, for one, think these bankers will be even more motivated to rape and pillage the financial system in order to rebuild their ill-gotten gains as fast as possible. Plus, you can bet their wives and girlfriends will give them the Lysistrata treatment until they have enough coin to send Sweetcheeks back to the Metropolitan Museum Gala in this year's dress.

The professional commentators and kibitzers have already weighed in on What This All Means to life, the universe, and everything, so I will spare you my trite regurgitations on moral hazard, social justice, and the price of peas in Shenzhen. Suffice it to say that this was a political decision by the Treasury and the Fed to intervene, and we will all enjoy years of political theater as various demagogues dissect, revile, and second-guess decisions made in the heat of the moment two weekends ago. Already, Senators Baucus and Grassley are sharpening their pitchforks and dusting off their torches for a nice, public lynching of the Great and Powerful involved. I could offer worse advice to Ben Bernanke and Hank Paulson than for the former to shave his shit-eating beard and the latter to practice looking short and humble, for a change.

From the perspective of Monty Python's cart driver, no-one has come off looking like a King in this scenario.

¹ Plus, I just returned from vacation, fer chrissakes. Which of you bozos is it who decides to push the Big Red Button every time I leave town for a little R&R? Sheesh.
² Back off, Political Correctness Police. This is a Wall Street rag, written from the point of view of the capital markets and investment banking. You want fair and balanced, go read the Bhutan Daily News. In the meantime, you can kiss my salty edamame.

© 2008 The Epicurean Dealmaker. All rights reserved.

Character Study

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 10 Mar 2008 23:30:00 +0000

And as to you, Sir, treacherous in private friendship (for so you have been to me, and that in the day of danger) and a hypocrite in public life, the world will be puzzled to decide whether you are an apostate or an impostor; whether you have abandoned good principles, or whether you ever had any.

— Thomas Paine, Letter to George Washington

* * *

Remember the Alamo

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 07 Mar 2008 16:30:00 +0000

"Then I need say no more," said Celeborn. "But do not despise the lore that has come down from distant years; for oft it may chance that old wives keep in memory word of things that once were needful for the wise to know."

— J.R.R. Tolkein, The Fellowship of the Ring

Well, it seems that the geniuses at The Carlyle Group have finally shit the bed. And in public, too. Oops.

Another crop of yahoos, drunk on their own power, reputation, and greed steered themselves (and their trusting investors) into a ditch by ignoring the most basic rules of the road:

Do not borrow short and lend long
Do not overlever securities which might become illiquid
Do not believe your own hype
Do stick to your knitting

Prior to this, the Carlyle troika of Rubenstein, Conway, and Aniello were almost universally believed to be nearly as smart as Albert Einstein before he started smoking weed and hanging out with the fruitcakes at the Institute for Advanced Study. I guess they knew better.

As Felix Salmon points out, it's all happened before. Long-Term Capital Management, anyone?

And, if I read the timeline right, Carlyle Capital kept doubling down and throwing more capital at the problem even after conclusive evidence had surfaced that the Great Prime Broker Leverage Unwind of 2007/2008 was well underway. By the end of last year, those yahoos were running a portfolio of $21.7 billion of securities on a base of $670 million worth of equity. That's thirty-two times leverage. You read correctly: 32x. I'm sorry, but I wouldn't leverage even a sure thing like Giselle Bundchen on quaaludes, mojitos, and Spanish Fly thirty-two to one.

Of course, the people running Carlyle Capital were convinced that their strategy made sense, that the mortgage securities in their portfolio were worth more than what the market said they were, and that, given time, all would work out for the best:

John Stomber, Chief Executive Officer, President and Chief Investment Officer of the Company, said, “The last few days have created a market environment where the repo counterparties’ margin prices for our AAA-rated U.S. government agency floating rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities. Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the Company’s repo counterparties to develop more stable financing terms.”

Sound familiar? It should.

In addition to the delicious irony that Mr. Stomber comes to Carlyle from Cerberus Capital, the hedge fund that is making a royal hash of its forays into private equity, this is yet another example of why you should not rely on subject-matter experts like traders to drive your risk management strategy. For the same reason, it is not wise to put an arboreal botanist—no matter how smart and experienced—in charge of forest management: they tend to have trouble seeing the forest fire for the trees.

But this is nothing new. This should not be a surprise. In addition to the numerous empirical examples we can all point to throughout history, there has been an endless parade of wise men promulgating pithy aphorisms perfectly designed to penetrate the brain of any thinking person and lodge there. I think now, in particular, of a well-known adage coined by John Maynard Keynes which might have saved Mr. Stomber and his colleagues a great deal of pain, embarrassment, and money, had they taken heed of it:

The market can stay irrational longer than you can stay solvent.

Or this little beauty, from the pen of George Santayana:

Those who cannot remember the past are condemned to repeat it.

I begin to worry that Messrs. Conway, Aniello, Rubenstein, and Stomber cannot read at all.

Nevertheless, in the devout hope that I am wrong, I will leave behind my own little chestnut as a guide and a warning to the readers of these sentences:

Those who do not read this blog are condemned to be featured in it.